BlackRock’s iShares has launched the iShares Barclays 0-5 Year TIPS Bond Fund (STIP) on the NYSE Arca.
The new exchange traded fund offers targeted exposure to the short end of the domestic Treasury Inflation Protected Security (TIPS) curve through TIPS with less than five years to maturity. The new fund is the only ETF that offers access to the very shortest end of the curve (zero to one year), and is intended to help investors seek protection against realized inflation, achieve additional portfolio diversification, or express a view on yields.
The new iShares Barclays 0-5 Year TIPS Bond Fund expands the iShares fixed income offering to 33 ETFs, which have seen a high level of interest in 2010 as investors seek income, a hedge against inflation and more precise fixed income exposure in the U.S. and internationally. According to FactSet, Bloomberg and BlackRock, iShares has the most fixed income ETFs and has received double the net flows into its fixed income offerings versus other ETF providers in 2010.
iShares fixed income ETFs have brought in $14 billion this year, as of November 30th, and currently have a total of $93 billion under management.
According to iShares, the new iShares Barclays 0-5 Year TIPS Bond Fund offers investors protection from inflation and further diversification in their portfolios along with a low sensitivity to interest rates. For example, a STIP investor would receive higher distributions if inflation increases over time, but would see less impact if interest rates rise than would an investor in a longer maturity TIPS fund.
The new iShares Barclays 0-5 Year TIPS Bond Fund invests only in TIPS securities with 0-5 years remaining to maturity. Unlike other TIPS ETFs, STIP holds securities until maturity. This means that securities acquired by STIP pay out inflation-adjusted income through the fund’s distributions and then return principle to the fund at maturity. These maturity proceeds are then used to purchase more TIPS securities.
As a result of this mechanism, a greater percentage of an investor’s return in STIP is made up of inflation adjusted income relative to other TIPS funds.
TIPS as an asset class have two primary benefits to investors:
1) Potential for inflation protection — a holder of TIPS receives compensation for increases in inflation. For STIP this compensation comes in the form of the monthly income distributions. As inflation rises, a holder of STIP will receive a larger monthly distribution.
2) Diversification — TIPS have historically had a low correlation with other asset classes and thus provide diversification to a broad portfolio.
The expense ratio for the new fund is 0.20%.